By Dr. David Kohl
Amongst all of the weather issues, trade disputes, and the elongated downturn in agriculture, one may only see the gloomy side of the agricultural equation. My task with this article is to shift gears and close out the decade with a walk on the sunny side of the agriculture industry.
As with the 1980s farm crisis, there are producers that are adjusting their mindset and business management. Instead of waiting for the next big thing or the economic super cycle, the proactive managers are adaptive and innovative in business strategy and tactics. Some producers are moving to value-added production, mining a few pennies here and there in the market. Small incremental changes compound overtime and result in “base hits” on the profit spectrum. For example, one proactive producer locked in a profitable price for corn in June, while others have held out for the proverbial homerun.
Others are improving their business management skills by dusting off the old playbook of managing the aspects that they can control and managing around the uncontrollable variables. Proactive producers take the mindset that the lender may request an updated balance sheet or a timely income or cash flow statement. However, what sets them apart from other producers is that they use the financial statements not only to obtain financing, but to make their business better. They work side-by-side with the lender or financial advisor to conduct peer benchmarking and analyze their business year-over-year as a financial comparison guide to develop proactive business strategy.
The “sunny side” producers are dialed in and know their strategy, numbers, and limitations. Some go the high-tech route and are able to utilize the best of biotechnology, engineering, and big data to gain a competitive advantage. At the other end of the spectrum, some “sunny side” producers choose the low-tech, low investment route and are extremely resourceful. They know how to squeeze a penny out of a rock and live a very frugal lifestyle. People often wonder how they accomplish so much with so little. They are the “get it done” type of producers who could be described as not fancy, but steady.
It is very interesting that when isolated and compared to peers, the “sunny side” producers of agriculture do three basic elements.
- Line by line cost and expense management
The mode of operation for these producers is a penny saved here and a dollar invested there to make a buck. They examine whether the marginal revenue is greater than the marginal cost of additional production. Cost and expense management is ingrained in their philosophy.
Another observation is that they are not afraid to change and think in the future. Some strategies and cost revenue management that work this year may be less advantageous in the future. Their mindset is to examine various scenarios and strategies using a team of formal and informal advisors. - Plan, execute, and monitor a risk management plan
The second element is that they know how to plan, execute, and monitor a risk management plan. Some will manage their own risk management plan internally, while others will utilize advisory teams with various degrees of formality. - Asset efficiency
Finally, the positive, proactive side of agriculture knows how to get the most out of their human and capital assets. Some also have side gigs such as custom work, trucking, or off-farm businesses to more efficiently utilize both capital and human assets. Other producers cut costs on the less productive labor. In some cases, cutting labor could be family members who are a drag on the financial and emotional health of the business.
The decade before us will be one that will observe more change in 10 years than we have seen the past 70 years. Producers who have the right mindset will be adaptive, innovative, and pay attention to financial and business management basics. This combination of attitude and aptitude will be the formula for the journey on the “sunny side” of profits and success in the life equation.
Dr. David Kohl energizes agricultural lenders, producers, and business professionals with his keen insight into the agricultural industry through extensive travel, research, and networking around the globe. He is a Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech, Blacksburg, VA. Dr. Kohl has traveled over 9 million miles in his career and conducted over 6,000 workshops and seminars for a variety of agricultural audiences. Additionally, Dr. Kohl’s personal involvement with agriculture provides a unique perspective into the future trends of the agricultural industry and economy.
